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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
 
 
MPM HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Commission File Number 333-201338
 
 
Delaware
 
47-1756080
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
MOMENTIVE PERFORMANCE MATERIALS INC.
(Exact name of registrant as specified in its charter)
Commission File Number 333-146093 
 
Delaware
 
20-5748297
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 

260 Hudson River Road
Waterford, NY 12188
 
(518) 233-3330
(Address of principal executive offices including zip code)
 
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
MPM Holdings Inc.                Yes  x    No  o
Momentive Performance Materials Inc.    Yes  x    No  o


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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
MPM Holdings Inc.                Yes  x    No  o
Momentive Performance Materials Inc.    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
MPM Holdings Inc.
Large accelerated filer
o
  
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
x
  
Smaller Reporting Company
o
 
 
 
 
 
 
 
 
Emerging Growth Company
o
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Momentive Performance Materials Inc.
Large accelerated filer
o
  
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
x
  
Smaller Reporting Company
o
 
 
 
 
 
 
 
 
Emerging Growth Company
o
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
MPM Holdings Inc.                Yes  o    No  x
Momentive Performance Materials Inc.    Yes  o    No  x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    
MPM Holdings Inc.                Yes  x    No  o
Momentive Performance Materials Inc.    Yes  x    No  o
The number of shares of common stock of MPM Holdings Inc., par value $0.01 per share, outstanding as of the close of business on April 27, 2018, was 48,163,690 shares.
The number of shares of common stock of Momentive Performance Materials Inc., par value $0.01 per share, outstanding as of the close of business on April 27, 2018, was 48 shares, all of which were held by MPM Intermediate Holdings Inc.
This Form 10-Q is a combined quarterly report being filed separately by two registrants: MPM Holdings Inc. and Momentive Performance Materials Inc.


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MPM HOLDINGS INC. AND MOMENTIVE PERFORMANCE MATERIALS INC.

INDEX

 
 
Page
Part I —
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II —
OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 


3

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Part I — FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 
MPM HOLDINGS INC.
 
MOMENTIVE PERFORMANCE MATERIALS INC.
(In millions, except share data)
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $1 at both March 31, 2018 and December 31, 2017)
$
174

 
$
174

 
$
173

 
$
174

Accounts receivable (net of allowance for doubtful accounts of $4 at both March 31, 2018 and December 31, 2017)
391

 
323

 
391

 
323

Inventories:
 
 
 
 
 
 
 
Raw materials
164

 
153

 
164

 
153

Finished and in-process goods
315

 
292

 
315

 
292

Other current assets
49

 
51

 
49

 
51

Total current assets
1,093

 
993

 
1,092

 
993

Investment in unconsolidated entities
20

 
19

 
20

 
19

Deferred income taxes
11

 
11

 
11

 
11

Other long-term assets
16

 
11

 
16

 
11

Property, plant and equipment:
 
 
 
 
 
 
 
Land
81

 
77

 
81

 
77

Buildings
349

 
338

 
349

 
338

Machinery and equipment
1,174

 
1,135

 
1,174

 
1,135

 
1,604

 
1,550

 
1,604

 
1,550

Less accumulated depreciation
(416
)
 
(383
)
 
(416
)
 
(383
)
 
1,188

 
1,167

 
1,188

 
1,167

Goodwill
220

 
216

 
220

 
216

Other intangible assets, net
297

 
300

 
297

 
300

Total assets
$
2,845

 
$
2,717

 
$
2,844

 
$
2,717

Liabilities and Equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
323

 
$
286

 
$
323

 
$
286

Debt payable within one year
36

 
36

 
36

 
36

Interest payable
25

 
12

 
25

 
12

Income taxes payable
8

 
7

 
8

 
7

Accrued payroll and incentive compensation
83

 
68

 
83

 
68

Other current liabilities
97

 
103

 
95

 
102

Total current liabilities
572

 
512

 
570

 
511

Long-term liabilities:
 
 
 
 
 
 
 
Long-term debt
1,198

 
1,192

 
1,198

 
1,192

Pension and postretirement benefit liabilities
341

 
335

 
341

 
335

Deferred income taxes
60

 
60

 
60

 
60

Other long-term liabilities
75

 
74

 
75

 
74

Total liabilities
2,246

 
2,173

 
2,244

 
2,172

Commitments and contingencies (See Note 8)
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
Common stock - $0.01 par value; 70,000,000 shares authorized; 48,163,690 and 48,121,634 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

 

Common stock - $0.01 par value; 100 shares authorized; 48 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

 

Additional paid-in capital
869

 
868

 
867

 
866

Accumulated other comprehensive income (loss)
16

 
(18
)
 
16

 
(18
)
Accumulated deficit
(286
)
 
(306
)
 
(283
)
 
(303
)
Total equity
599

 
544

 
600

 
545

Total liabilities and equity
$
2,845

 
$
2,717

 
$
2,844

 
$
2,717


See Notes to Condensed Consolidated Financial Statements

4

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MPM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
 
Three Months Ended March 31,
(In millions, except share and per share data)
 
2018
 
2017
Net sales
 
$
657

 
$
544

Cost of sales
 
503

 
446

Gross profit
 
154

 
98

Costs and expenses:
 

 
 
Selling, general and administrative expense
 
86

 
83

Research and development expense
 
17

 
15

Restructuring and discrete costs (See Note 4)
 
1

 
5

Other operating expense (income), net
 
1

 
3

Operating income (loss)
 
49

 
(8
)
Interest expense, net (See Note 7)
 
20

 
19

Non-operating expense (income), net
 
3

 
2

Reorganization items, net
 
1

 

Income (loss) before income taxes and earnings from unconsolidated entities
 
25

 
(29
)
Income tax expense (See Note 13)
 
6

 
1

Income (loss) before earnings from unconsolidated entities
 
19

 
(30
)
Earnings from unconsolidated entities, net of taxes
 
1

 

Net income (loss)
 
$
20

 
$
(30
)
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
Net income (loss) per common share—basic
 
$
0.42

 
$
(0.62
)
Net income (loss) per common share—diluted
 
$
0.41

 
$
(0.62
)
Shares used in per-share calculation
 
 
 
 
Weighted average common shares outstanding—basic
 
48,129,578

 
48,084,933

Weighted average common shares outstanding—diluted
 
48,652,135

 
48,084,933


See Notes to Condensed Consolidated Financial Statements

5

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MOMENTIVE PERFORMANCE MATERIALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
 
Three Months Ended March 31,
 (In millions)
 
2018
 
2017
Net sales
 
$
657

 
$
544

Cost of sales
 
503

 
446

Gross profit
 
154

 
98

Costs and expenses:
 
 
 
 
Selling, general and administrative expense
 
86

 
82

Research and development expense
 
17

 
15

Restructuring and discrete costs (See Note 4)
 
1

 
5

Other operating expense (income), net
 
1

 
3

Operating income (loss)
 
49

 
(7
)
Interest expense, net (See Note 7)
 
20

 
19

Non-operating expense (income), net
 
3

 
2

Reorganization items, net
 
1

 

Income (loss) before income taxes and earnings from unconsolidated entities
 
25

 
(28
)
Income tax expense (See Note 13)
 
6

 
1

Income (loss) before earnings from unconsolidated entities
 
19

 
(29
)
Earnings from unconsolidated entities, net of taxes
 
1

 

Net income (loss)
 
$
20

 
$
(29
)

See Notes to Condensed Consolidated Financial Statements


6

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
MPM HOLDINGS INC.
 
Three Months Ended March 31,
(In millions)
2018
 
2017
Net income (loss)
$
20

 
$
(30
)
Other comprehensive income, net of tax:
 
 
 
Foreign currency translation
35

 
22

Net prior service credit
(1
)
 
11

Other comprehensive income
34

 
33

Comprehensive income
$
54

 
$
3


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended March 31,
(In millions)
2018
 
2017
Net income (loss)
$
20

 
$
(29
)
Other comprehensive income, net of tax:
 
 
 
Foreign currency translation
35

 
22

Net prior service credit
(1
)
 
11

Other comprehensive income
34

 
33

Comprehensive income
$
54

 
$
4


See Notes to Condensed Consolidated Financial Statements

7

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
MPM HOLDINGS INC.
 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended March 31,
 
Three Months Ended March 31,
(In millions)
2018
 
2017
 
2018
 
2017
Cash flows provided by (used in) operating activities
 
 
 
 
 
 
 
Net income (loss)
$
20

 
$
(30
)
 
$
20

 
$
(29
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
40

 
38

 
40

 
38

Unrealized actuarial losses from pensions and other post retirement liabilities

 
1

 

 
1

Deferred income tax benefit
(2
)
 
(5
)
 
(2
)
 
(5
)
Unrealized foreign currency losses
3

 

 
3

 

Amortization of debt discount and ABL deferred financing costs
6

 
6

 
6

 
6

Stock based compensation
1

 
1

 
1

 
1

Loss due to impaired and scrapped assets

 
3

 

 
3

Other non-cash adjustments
(1
)
 

 
(1
)
 

Net change in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
(62
)
 
(32
)
 
(62
)
 
(32
)
Inventories
(26
)
 

 
(26
)
 

Accounts payable
37

 
(1
)
 
37

 
(1
)
Income taxes payable
1

 
(3
)
 
1

 
(3
)
Other assets, current and non-current
4

 
2

 
4

 
2

Other liabilities, current and non-current
15

 
3

 
14

 
2

Net cash provided by (used in) operating activities
36

 
(17
)
 
35

 
(17
)
Cash flows used in investing activities
 
 
 
 
 
 
 
Capital expenditures
(35
)
 
(37
)
 
(35
)
 
(37
)
Purchase of a business

 
(9
)
 

 
(9
)
Net cash used in investing activities
(35
)
 
(46
)
 
(35
)
 
(46
)
Cash flows used in financing activities
 
 
 
 
 
 
 
Net short-term debt repayments
(1
)
 

 
(1
)
 

ABL financing fees
(4
)
 

 
(4
)
 

Net cash used in financing activities
(5
)


 
(5
)
 

Decrease in cash, cash equivalents, and restricted cash
(4
)
 
(63
)
 
(5
)
 
(63
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
4


2

 
4

 
2

Cash, cash equivalents, and restricted cash at beginning of period
174

 
228

 
174

 
228

Cash, cash equivalents, and restricted cash at end of period
$
174

 
$
167

 
$
173

 
$
167

Supplemental disclosures of cash flow information
 
 
 
 
 
 
 
Cash paid for:
 
 
 
 
 
 
 
Interest
$
1

 
$
1

 
$
1

 
$
1

Income taxes, net of refunds
7

 
9

 
7

 
9

Non-cash investing activity:
 
 
 
 
 
 
 
Capital expenditures included in accounts payable
$
16

 
$
18

 
$
16

 
$
18


See Notes to Condensed Consolidated Financial Statements

8

Table of Contents




CONDENSED CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

MPM HOLDINGS INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Equity
(In millions, except share data)
 
Shares
 
Amount
 
 
 
 
Balance as of December 31, 2017
 
48,121,634

 
$

 
$
868

 
$
(18
)
 
$
(306
)
 
$
544

Net income
 

 

 

 

 
20

 
20

Other comprehensive income
 

 

 

 
34

 

 
34

Stock-based compensation expense
 

 

 
1

 

 

 
1

Issuance of common stock
 
42,056

 

 

 

 

 

Balance as of March 31, 2018
 
48,163,690

 
$

 
$
869

 
$
16

 
$
(286
)
 
$
599


MOMENTIVE PERFORMANCE MATERIALS INC.
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except share data)
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Equity
Balance as of December 31, 2017
 

 
$

 
$
866

 
$
(18
)
 
$
(303
)
 
$
545

Net income
 

 

 

 

 
20

 
20

Other comprehensive income
 

 

 

 
34

 

 
34

Capital contribution from parent
 

 

 
1

 

 

 
1

Balance as of March 31, 2018
 

 
$

 
$
867

 
$
16

 
$
(283
)
 
$
600


See Notes to Condensed Consolidated Financial Statements

9

Table of Contents

MPM HOLDINGS INC. AND MOMENTIVE PERFORMANCE MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In millions, except share and per share data)


1. Business and Basis of Presentation
MPM Holdings Inc. (“Momentive”) is a holding company that conducts substantially all of its business through its subsidiaries. Momentive’s wholly owned subsidiary, MPM Intermediate Holdings Inc. (“Intermediate Holdings”), is a holding company for its wholly owned subsidiary, Momentive Performance Materials Inc. (“MPM” or the “Company”) and its subsidiaries. Momentive became the indirect parent company of MPM in accordance with MPM’s plan of reorganization (the “Plan”) pursuant to MPM’s emergence from Chapter 11 bankruptcy on October 24, 2014 (the “Effective Date” or the “Emergence Date”). Prior to its reorganization, MPM, through a series of intermediate holding companies, was controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and subsidiaries, “Apollo”). Unless otherwise noted, references to “we,” “us,” “our” or the “Company” refer collectively to Momentive and MPM and their subsidiaries, and, unless otherwise noted, the information provided pertains to both Momentive and MPM. Differences between the financial results of Momentive and MPM represent certain management expenses of and cash received by Momentive and therefore are not consolidated within the results of MPM.

Based in Waterford, New York, the Company is comprised of four reportable segments: Performance Additives, Formulated and Basic Silicones, Quartz Technologies and Corporate. Performance Additives is a global business engaged in the manufacture, sale and distribution of urethane additives, silicone fluids and silanes. Formulated and Basic Silicones is a global business engaged in the manufacture, sale and distribution of coatings, electronics materials, elastomers, sealants, and basic silicone fluids. Quartz Technologies, also a global business, is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. Corporate includes corporate, general and administrative expenses that are not allocated to the other segments, such as certain shared service and other administrative functions.
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights. Intercompany accounts and transactions are eliminated upon consolidation. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement have been included. Results for the interim periods are not necessarily indicative of results for the entire year.
Year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the accompanying notes included in Momentive, MPM and their subsidiaries’ most recent Annual Report on Form 10-K for the year ended December 31, 2017.

2. Summary of Significant Accounting Policies
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and also requires the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Actual results could differ from these estimates.
Subsequent Events—As a public reporting company, the Company evaluates subsequent events and transactions through the date these unaudited Condensed Consolidated Financial Statements are issued.
Reclassifications—Certain prior period balances have been reclassified to conform with current presentations.
Net Income (Loss) Per Share—Momentive calculates earnings per share as the ratio of net income (loss) to weighted average basic and diluted common shares outstanding.
Stock-Based Compensation—The Company measures and recognizes the compensation expense for all share-based awards made to employees and directors based on estimated fair values, in accordance with ASC 718, Compensation – Stock Compensation. The fair value of stock options granted is calculated using a Monte Carlo option-pricing model on the date of the grant, and the fair value of Restricted Stock Units are valued using the fair market value of the Company’s common stock on the date of grant. Compensation expense is recognized over the employee’s requisite service period (generally the vesting period of the equity grant). See Note 9 for additional details regarding stock-based compensation.

Business Acquisitions—In January 2017 the Company acquired the operating assets of Sea Lion Technology, Inc. to further support the Silanes business of its Performance Additives segment. The Company previously had a tolling relationship with Sea Lion Technology, Inc. on their site. The acquisition enabled the Company to further strategically leverage its assets in support of the NXT* silane business. The Company paid $9 in cash to acquire Sea Lion Technology, Inc., and acquired substantially all of its property, plant and equipment. This acquisition

10


was not significant in relation to the Company’s consolidated financial results and, therefore, pro forma financial information has not been presented.
    
The acquisition was accounted for using the purchase method of accounting and the allocation of the purchase price inclusive of identification and measurement of the fair value of tangible and intangible assets. The Company engaged specialists to assist in the valuation of tangible and intangible assets. The table below summarizes the initial purchase price allocation to the fair value of assets acquired at the acquisition date. Goodwill is calculated as the excess of the purchase price over the total assets recognized and represents the estimated future economic benefits arising from expected synergies and growth opportunities for the Company. All of the goodwill and intangible assets are deductible for tax purposes.

Property, plant & equipment
$
7

Goodwill
1

Intangible assets
1

Purchase price of the business acquisition
$
9

*NXT is a trademark of Momentive Performance Materials Inc.
    
Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Board Update No. 2014-09: Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Additionally, in March 2016, the FASB issued Accounting Standards Board Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Board Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”), which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued Accounting Standards Board Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which provides clarifying guidance in certain narrow areas and adds some practical expedients. In December 2016, the FASB issued Accounting Standards Board Update No. 2016-20, Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers (“ASU 2016-20”), which facilitates 13 technical corrections and improvements to Topic 606 and other Topics amended by ASU 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. In September 2017, the FASB issued Accounting Standards Board Update No. 2017-13: Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842) (“ASU 2017-13”), which clarifies transition provisions for certain public business entities. The effective dates for the ASUs issued in 2016 and 2017 are the same as the effective date for ASU 2014-09. On January 1, 2018, the Company adopted ASU 2014-09 and all the related amendments: ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-13, together deemed as new revenue standard - Accounting Standards Codification Topic 606 Revenue from Contracts with Customers, using the modified retrospective method on contracts that are not yet complete as of the initial application of the new revenue standard. The adoption of ASU 2014-09 did not materially impact the Company’s financial statements, as the Company’s sales revenue continues to be recognized when the transfer of control of the products occurs dictated by the commercial terms governing the arrangement and evaluation of the transfer of the risks and rewards.
In February 2016, the FASB issued Accounting Standards Board Update No. 2016-02: Leases (ASC 842) (“ASU 2016-02”). Pursuant to the guidance in ASU 2016-02, lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. In September 2017, the FASB issued Accounting Standards Board Update No. 2017-13: Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which clarifies transition provisions for certain public business entities. In January 2018, the FASB issued Accounting Standards Update No. 2018-01: Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842, which provides an optional practical expedient related to expired and existing land easements. The effective dates for the ASUs issued in 2017 and 2018 are the same as the effective date for ASU 2016-02. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company has identified its substantial leases impacted by ASC 842 and expects this impact to be material due to the need to recognize the Company’s operating leases on its balance sheet as a right-of-use asset and a lease liability.
In August 2016, the FASB issued Accounting Standards Board Update No. 2016-15: Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides new guidance designed to reduce existing

11


diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU addresses eight specific cash flow issues, of which the following are expected to be applicable to the Company: 1) debt prepayment and extinguishment costs, 2) proceeds from settlement of insurance claims, 3) distributions received from equity method investments, and 4) separately identifiable cash flows and application of the predominance principle. In addition, in November 2016, the FASB issued Accounting Standards Board Update No. 2016-18: Statement of Cash Flows (Topic 230), Restricted Cash ("ASU 2016-18"). ASU 2016-18 clarifies certain existing principles in ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. These ASUs will be effective for the Company’s fiscal year beginning January 1, 2018 and subsequent interim periods, with retrospective application to each period presented being required and early adoption is permitted. On January 1, 2018, the Company adopted ASU 2016-15 and ASU 2016-18, resulting in an immaterial modification of the Company's current disclosures and reclassifications within the consolidated statement of cash flows.
In January 2017, the FASB issued Accounting Standards Board Update No. 2017-01: Business Combinations (Topic 805) - Clarifying the Definition of a Business (“ASU 2017-01”). The ASU clarifies the definition of business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company’s fiscal year beginning January 1, 2018 and subsequent interim periods with prospective application with impacts on the Company’s consolidated financial statements that may vary depending on each specific acquisition. Early adoption is conditionally permitted. On January 1, 2018, the Company adopted ASU 2017-01, and this ASU did not have a significant impact on its financial statements or disclosures.
  In January 2017, the FASB issued Accounting Standards Board Update No. 2017-04: Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value, which eliminates the current requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying amount. The amendments in this ASU are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this standard as of October 1, 2017, and this ASU did not have a significant impact on its financial statements or disclosures.
In February 2017 the FASB issued Accounting Standards Board Update No. 2017-05: Other Income - Gains and Loss from Derecognition of Nonfinancial Assets (subtopic 610-20). The amendments in this ASU provide clarification that nonfinancial assets within the scope of ASC 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty and that an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations. The amendments in this ASU also require entities to de-recognize a distinct non-financial asset or distinct in substance non-financial asset in a partial sale transaction when it (1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with ASC 810 and (2) transfers control of the asset in accordance with ASC 606. The amendments to this ASU are effective in fiscal years beginning after December 15, 2017, including interim periods within those annual periods. On January 1, 2018, the Company adopted ASU 2017-05 and the adoption of the amendments in this ASU did not have a significant impact on the Company’s consolidated financial statements.
In March 2017 the FASB issued Accounting Standards Update No. 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). ASU 2017-07 requires entities to: 1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and 2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, ASU 2017-07 requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. ASU 2017-07’s amendments are effective for interim and annual periods beginning after December 15, 2017. On January 1, 2018, the Company adopted ASU 2017-07, resulting in an impact on the Company’s consolidated income statements. As discussed in Note 10, the Company discloses various components of net benefit cost in the specific pension and other postretirement benefit plans footnote as the basis for the retrospective application.
In May 2017 the FASB issued Accounting Standards Update No. 2017-09: Compensation - Stock Compensation (Topic 718). The amendments in the ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The ASU’s amendments are effective for interim and annual periods beginning after December 15, 2017. An entity needs to apply the amendments in this ASU on a prospective basis to an award modified on or after the adoption date. The Company adopted this standard as of January 1, 2018, and this ASU did not have a significant impact on its financial statements or disclosures.
All other new accounting pronouncements issued but not yet effective or adopted have been deemed to be not relevant to the Company and, accordingly, are not expected to have an impact once adopted.
3. Revenue Recognition
Revenue is recognized when obligations under the terms of a contract or purchase order from a customer of the Company are satisfied. The payment terms under a contract are generally defined within the relevant contract or the purchase order. Standard payment terms are generally within 30-45 days of the invoice. For the purpose of allocation of price to the distinct deliverables within a contract with a customer, the Company assesses the materiality of multiple explicit or implicit distinct deliverables in the contract. Generally, the revenue recognition occurs with the transfer of control of the product underlying the contract/purchase order dictated by the commercial terms governing the arrangement and

12


evaluation of the transfer of risk and rewards. The Company has determined that the transfer of risks and rewards is the strongest indicator of the point in time that control has transferred to the customer, and the indicator is largely dictated by the relevant shipping terms. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods net of estimated allowances and returns. Contracts are negotiated over a long time horizon, during which there will inevitably be fluctuations in fixed and variable costs. The exact amount of the price increases for fixed and variable cost may or may not be explicitly stated in the contract with the customer. Such change may be specified via escalation of the base prices based on costs at contract inception.
The Company determined the fixed and variable considerations of its contracts with customers at the date of adoption on January 1, 2018, and performed a single, standalone selling price allocation to all of the distinct deliverables in the contracts with each customer. The Company expenses the contract origination costs whose amortization period, if any, is expected to be less than one year.
The Company does not recognize revenue on contracts that convey the right to a customer to return the product for reasons other than the product being damaged or defective, recognizing revenue only when payment is received or the right to return the product expires.
Shipping and handling costs that are billed to customers are included in Net sales in the Consolidated Statements of Operations. The Company treats shipping and handling costs that occur after transfer of control as a fulfillment activity and accordingly accrues for such costs at the time of shipment. Sales, value add, and other taxes that the Company collects concurrent with revenue-producing activities are excluded from revenue.
    The following table disaggregates our net sales by end market:
 
 
 
Quarter ended March 31,
End Market:
 
 
2018
 
2017
Agriculture
 
 
14

 
11

Automotive
 
 
124

 
106

Construction
 
 
67

 
59

Consumer
 
 
148

 
135

Electronics
 
 
43

 
38

Energy
 
 
16

 
13

Healthcare
 
 
17

 
14

Industrial
 
 
153

 
112

Personal Care
 
 
59

 
45

Textiles
 
 
16

 
11

Total net sales
 
 
657

 
544

Net sales by end market is the information outside of the Company’s financial statements which was provided in the past. The Company believes net sales by end market is the most relevant disaggregation information for the Company. The Performance Additives and Formulated and Basic Silicones segments cater to all of the end markets whereas the Quartz Technologies segment primarily caters to the industrial and electronics end markets.
4. Restructuring Expenses and Discrete Costs

Included in restructuring and discrete costs are costs related to restructuring (primarily severance payments associated with work force reductions) and services and other expenses associated with cost optimization programs and transformation savings activities.    

The following table sets forth the changes in the restructuring reserve related to severance. Included in this table are minor restructuring programs that were undertaken by the Company in different locations, none of which were individually material. These costs are primarily related to workforce reductions:
 
 
Total
Accrued liability at December 31, 2017
 
4

Restructuring charges
 

Adjustments
 

Payments
 
(2
)
Accrued liability at March 31, 2018
 
$
2


For the three months ended March 31, 2018 and 2017, the Company recognized other costs of $1 and $4, respectively. The costs in 2018 and 2017 were primarily comprised of one-time expenses for services and integration and are included in “Restructuring and discrete costs” in the Condensed Consolidated Statements of Operations. Refer to Note 11 for further details regarding these costs.

13


5. Related Party Transactions
Transactions with Hexion
Shared Services Agreement

In October 2010, the Company entered into a shared services agreement with Hexion Inc. (“Hexion”) (which, from October 1, 2010 through October 24, 2014, was a subsidiary under a common parent and thereafter, an entity controlled by a significant shareholder of the Company) (the “Shared Services Agreement”). Under this agreement, the Company provides to Hexion, and Hexion provides to the Company, certain services, including, but not limited to, legal, information technology hardware, and procurement services. The Shared Services Agreement establishes certain criteria upon which the cost of such services are allocated between the Company and Hexion. The Shared Services Agreement was renewed for one year starting in October 2017, is subject to termination by either the Company or Hexion, without cause, on not less than 30 days’ written notice, and expires in October 2018 (subject to one-year renewals every year thereafter; absent contrary notice from either party).
Pursuant to the Shared Services Agreement, during the three months ended March 31, 2018 and 2017, the Company incurred approximately $7 and $14, respectively, of net costs for shared services and Hexion incurred approximately $8 and $22, respectively, of net costs for shared services. Included in the net costs incurred during the three months ended March 31, 2018 and 2017, were net billings from Hexion to the Company of $3 and $9, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to the applicable allocation percentage. The allocation percentages are reviewed by the Steering Committee pursuant to the terms of the Shared Services Agreement. The Company had accounts payable to Hexion of $2 and $3 at March 31, 2018 and December 31, 2017, respectively, and no accounts receivable from Hexion under this agreement.
Other Transactions with Hexion
In April 2014, the Company sold 100% of its interest in its Canadian subsidiary to a subsidiary of Hexion for a purchase price of $12. As a part of the transaction the Company also entered into a non-exclusive distribution agreement with a subsidiary of Hexion, whereby the subsidiary of Hexion will act as a distributor of certain of the Company’s products in Canada. The agreement has a term of 10 years, and is cancelable by either party with 180 days’ notice. The Company compensates the subsidiary of Hexion for acting as distributor at a rate of 2% of the net selling price of the related products sold. During the three months ended March 31, 2018 and 2017, the Company sold $7 and $5, respectively, of products to Hexion under this distribution agreement, and paid less than $1 to Hexion as compensation for acting as distributor of the products for all periods. As of March 31, 2018 and December 31, 2017, the Company had accounts receivable from Hexion related to the distribution agreement of $3 and $2, respectively.
    
The Company also sells other products to, and purchases products from Hexion. These transactions were not material as of March 31, 2018 and 2017.
Purchases and Sales of Products and Services with Affiliates other than Hexion.

The Company also sells products to, and purchases products from its affiliates other than Hexion. These transactions were not material as of March 31, 2018.

6. Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy exists, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are:
Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.
Level 3: Unobservable inputs, that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

14


Recurring Fair Value Measurements
At both March 31, 2018 and December 31, 2017, the Company had less than $1 of natural gas derivative contracts, which are measured using Level 2 inputs, and are included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets. The fair value of the natural gas derivative contracts generally reflects the estimated amounts that the Company would receive or pay, on a pre-tax basis, to terminate the contracts at the reporting date based on broker quotes for the same or similar instruments. Counter-parties to these contracts are highly rated financial institutions, none of which experienced any significant downgrades that would reduce the fair value receivable amount owed, if any, to the Company. There were no transfers between Level 1, Level 2 or Level 3 measurements during the three months ended March 31, 2018.

Non-derivative Financial Instruments
The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:
 
 
Carrying Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
Debt
 
$
1,234

 
$

 
$
1,401

 
$

 
$
1,401

December 31, 2017
 
 
 
 
 
 
 
 
 
 
Debt
 
$
1,228

 
$

 
$
1,391

 
$

 
$
1,391

Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. Fair values of debt are based upon the aggregate principal amount of each instrument, and do not include any unamortized debt discounts or premiums. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

7. Debt Obligations
As of March 31, 2018 and December 31, 2017, the Company had no outstanding borrowings under its senior secured asset-based revolving loan facility (the “ABL Facility”). On March 2, 2018, the Company entered into an amendment to its ABL Facility to extend the maturity of the ABL Facility from October 2019 to March 2, 2023 and increase the commitments under the ABL Facility by $30 for a total of $300, incurring $4 of fees for this amendment which is being amortized through March 2, 2023 on a straight line basis. Outstanding letters of credit under this revised ABL Facility at March 31, 2018 were $56, leaving an unused borrowing capacity of $244.
As of March 31, 2018, the Company was in compliance with all the covenants included in the agreements governing its outstanding indebtedness.
At March 31, 2018, the weighted average interest rate of the Company’s long term debt was 4.35%.

15


Debt outstanding at March 31, 2018 and December 31, 2017 was as follows:
 
March 31, 2018
 
December 31, 2017
 
Long-Term
 
Due Within One Year
 
Long-Term
 
Due Within One Year
Senior Secured Credit Facilities:
 
 
 
 
 
 
 
ABL Facility
$

 
$

 
$

 
$

Secured Notes:
 
 
 
 
 
 
 
3.88% First-Priority Senior Secured Notes due 2021 (includes $80 and $85 of unamortized debt discount, respectively)
1,020

 

 
1,015

 

4.69% Second-Priority Senior Secured Notes due 2022 (includes $24 and $25 of unamortized debt discount, respectively)
178

 

 
177

 

Other Borrowings:
 
 
 
 
 
 
 
China bank loans

 
36

 

 
36

Total debt
$
1,198

 
$
36

 
$
1,192

 
$
36

Momentive is not an obligor under the debt obligations above. MPM is a borrower under the ABL Facility and the issuer of the secured notes, which are fully and unconditionally guaranteed by certain subsidiaries of MPM (see Note 15).

8. Commitments and Contingencies
Non-Environmental Legal Matters
The Company is involved in various legal proceedings in the ordinary course of business and had reserves of $3 and $4 at March 31, 2018 and December 31, 2017, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable, all of which are included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets.
In connection with the bankruptcy cases, in September 2014, BOKF, NA, as trustee (the “First Lien Trustee”) for MPM’s previously issued 8.875% First-Priority Senior Secured Notes due 2020 (the “Old First Lien Notes”), and Wilmington Trust, National Association, as trustee (the “1.5 Lien Trustee” and together with the First Lien Trustee, the “Appellants”) for MPM’s previously issued 10% Senior Secured Notes due 2020 (the “Old Secured Notes”) jointly appealed to the U.S. District Court for the Southern District of New York (the “District Court”) seeking reversal of the U.S. Bankruptcy Court of the Southern District of New York’s (the “Bankruptcy Court”) determinations that the interest rates on the 3.88% First Lien Notes due 2021 (the “First Lien Notes”) and the 4.69% Second Lien Notes due 2022 (the “Second Lien Notes”) under the Plan of Reorganization was proper and in accordance with United States Bankruptcy Code. In May 2015, the District Court affirmed the Bankruptcy Court’s rulings, and the trustees subsequently appealed the District Court decision to the United States Court of Appeals for the Second Circuit (the “Second Circuit”). In October 2017, the Second Circuit reversed the District Court’s determination with respect to the interest rates and remanded the issue to the Bankruptcy Court for further proceedings. An adverse resolution of this matter could result in an obligation by the Company to make a catch-up payment for past due interest and an increase in the Company’s interest costs going forward. At this time, the Company is unable to estimate any reasonably possible loss, or range of losses, with regard to this matter.

Environmental Matters
The Company is involved in certain remediation actions to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs at each site are based on the Company’s best estimate of discounted future costs. As of both March 31, 2018 and December 31, 2017, the Company had recognized total obligations of approximately $12 for remediation costs at the Company’s manufacturing facilities and off-site landfills. These amounts are included in “Other long-term liabilities” in the unaudited Condensed Consolidated Balance Sheets.
Included in these liabilities is $8 related to groundwater treatment at the Company’s Waterford, NY site. In 1988, a consent decree was signed with the State of New York which requires recovery of groundwater at the site to contain migration of specified contaminants in the groundwater. A groundwater pump and treat system and groundwater monitoring program are currently operational to implement the requirements of this consent decree.
Due to the long-term nature of the project and the uncertainty inherent in estimating future costs of implementing this program, this liability was recorded at its net present value, which assumes a 3% discount rate and an estimated time period of 50 years and is included in our total obligations as discussed above. The undiscounted obligations, which are expected to be paid over the estimated period, are approximately $17. Over the next five years the Company expects to make ratable payments totaling approximately $2.


16


9. Equity Plans and Stock Based Compensation
Management Equity Plan
On March 12, 2015, the Board of Directors of Momentive approved the MPM Holdings Inc. Management Equity Plan (the “MPMH Equity Plan”). Under the MPMH Equity Plan, Momentive can award no more than 3,818,182 shares which may consist of options, restricted stock units, restricted stock and other stock-based awards, qualifying as equity classified awards in accordance with ASC 718 “Compensation - Stock Compensation”. The restricted stock units are non-voting units of measurement which are deemed to be equivalent to one common share of Momentive. The options are options to purchase common shares of Momentive. The awards contain restrictions on transferability and other typical terms and conditions. The purpose of the MPMH Equity Plan is to assist the Company in attracting, retaining, incentivizing and motivating employees and to promote the success of the Company’s business by providing such participating individuals with a proprietary interest in the performance of the Company.
The Compensation Committee of the Board of Directors of Momentive has approved grants under the MPMH Equity Plan of restricted stock units and options to certain of the Company’s key managers, including the Company’s named executive officers (“NEOs”) and certain directors of the Company.
The following is a summary of key terms of the stock-based awards granted under the MPMH Equity Plan:
Award
 
Vesting Terms
 
Option/Unit Terms
Stock Options—Tranche A
 
Performance-based and market-based upon achievement of targeted common stock prices either through a Sale or an IPO with certain conditions as such terms are defined by the MPMH Equity Plan
 
10 years
Stock Options—Tranche B
 
Performance-based and market-based upon achievement of targeted common stock prices either through a Sale or an IPO with certain conditions as such terms are defined by the MPMH Equity Plan
 
10 years
Employees and NEOs Restricted Stock Units grant
 
Cliff vest four years after grant date; Immediate vesting upon a Sale and ratable vesting in the event of an IPO as defined in the MPMH Equity Plan
 
NA
Directors Restricted Stock Units grant
 
Cliff vest annually after grant date; Immediate vesting upon a Sale as defined in the MPMH Equity Plan
 
NA
Stock Options
The estimated fair values of Stock Options granted and the assumptions used for the Monte Carlo option-pricing model were as follows:
 
 
March 31, 2018
 
March 31, 2017
 
 
Tranche A
 
Tranche B
 
Tranche A
 
Tranche B
Estimated grant date fair values
 
$
9.83

 
$
8.93

 
$
9.83

 
$
8.93

Assumptions:
 
 
 
 
 
 
 
 
Strike Price
 
$
10.25

 
$
10.25

 
$
10.25

 
$
10.25

Risk-free interest rate
 
0.80
%
 
0.80
%
 
0.80
%
 
0.80
%
Expected term
 
1.62 years

 
1.62 years

 
1.62 years

 
1.62 years

Expected volatility
 
60.00
%
 
60.00
%
 
60.00
%
 
60.00
%
Tranche Market Threshold
 
$
20.00

 
$
25.00

 
$
20.00

 
$
25.00













17


Information on Stock Options activity is as follows:
 
 
Tranche A
Tranche B
 
 
Units
 
Weighted-Average
Exercise Price per Share

Units
 
Weighted-Average
Exercise Price per Share

Balance at January 1, 2018
 
782,040

 
$
10.33

782,040

 
$
10.33

Granted
 

 


 

Exercised
 

 


 

Forfeited
 

 


 

Expired
 

 



 


Balance as of March 31, 2018
 
782,040

 
$
10.33

782,040

 
$
10.33


As there have been no performance and market based achievements since the date of the original grant, there has been no compensation expense recorded during the three months ended March 31, 2018 and 2017 with respect to stock options. At both March 31, 2018 and December 31, 2017, unrecognized compensation expense related to non-vested stock options was $15. Stock-based compensation cost related to stock options will be recognized once the satisfaction of the performance condition becomes probable.
Restricted Stock Units
Information on Restricted Stock Units activity is as follows:
 
 
Units
Weighted-Average
Grant Date Fair Value per Share

Aggregate Fair Value

Balance at January 1, 2018
 
712,376

$
19.92


Granted
 
30,870

24.30


Vested
 
(42,056
)
18.28

1

Forfeited
 



Expired
 



Balance as of March 31, 2018
 
701,190

$
20.25


The fair market values related to the RSUs at the different grant dates were derived from material financial weighted analysis of the Company’s value as implied at emergence from Chapter 11 Bankruptcy or by the sales of stock completed with related parties and adjusted to reflect current and future market conditions and the Company’s expected financial performances at the grant date. The material financial weighted analysis consisted of (i) a discounted cash flow analysis, (ii) a selected publicly traded company analysis and (iii) a selected transactions analysis. The employees’ and named executive officers’ RSUs are 100% vested upon the fourth anniversary of the date of grant (“Scheduled Vesting Date”) provided that the grantee remains continuously employed in active service by the Company or one of its affiliates from the date of grant through the Scheduled Vesting Date. The directors’ RSUs are 100% vested upon the first anniversary of the date of grant.
Additionally, vesting of the RSU grants could be accelerated: (i) upon a Sale of the Company occurring prior to the Scheduled Vesting Date, the RSUs, to the extent unvested, shall become fully vested, subject to the grantee’s continued employment through the effective date of such Sale; or (ii) upon an IPO occurring prior to the Scheduled Vesting Date, a graded percentage of the employees’ RSUs, shall become vested subject to the grantee’s continued employment through the effective date of the IPO.
There were no performance-based achievements during the three months ended March 31, 2018. The fair value of the Company’s RSUs, net of forfeitures, is expensed on a straight-line basis over the required service period.
Stock-based compensation expense related to the RSU awards was approximately $1 for both the three months ended March 31, 2018 and 2017. As of March 31, 2018, unrecognized compensation related to RSU awards was $4 and expense will be recognized over the remaining 1.13 years vesting period. Stock-based compensation cost related to RSU awards may be accelerated once the satisfaction of one of the performance conditions outlined becomes probable.
Although the MPMH Equity Plan, under which the above awards were granted, was issued by Momentive, substantially all of the underlying compensation cost represents compensation costs paid by Momentive on MPM’s behalf, as a result of the MPM’s employees’ services to MPM. Upon vesting of awards, Momentive will issue new stock to deliver shares under the MPMH Equity Plan.

18


10. Pension and Postretirement Benefit Plans
The following are the components of the Company’s net pension and postretirement (benefit) expense for the three months ended March 31, 2018 and 2017:


 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2018
 
 
2017
 
2018
 
 
2017
 
U.S. Plans
 
Non-U.S. Plans
 
 
U.S. Plans
 
Non-U.S. Plans
 
U.S. Plans
 
Non-U.S. Plans
 
 
U.S. Plans
 
Non-U.S. Plans
Service cost (1)
$
2

 
$
3

 
 
$
2

 
$
3

 
$

 
$

 
 
$

 
$

Interest cost on projected benefit obligation
2

 
1

 
 
2

 
1

 

 

 
 

 

Expected return on assets
(3
)
 

 
 
(2
)
 

 

 

 
 

 

Amortization of prior service credit

 

 
 

 

 
(1
)
 

 
 
(1
)
 

Actuarial loss (2)

 


 
 

 

 

 

 
 
1

 

Net periodic benefit cost
$
1

 
$
4

 
 
$
2

 
$
4

 
$
(1
)
 
$

 
 
$

 
$


(1)
Service cost of $4 and $1 were recorded in Cost of sales and Selling, general and administrative expense, respectively, for both the three months ended March 31, 2018 and 2017. All non-service costs are included in Non-operating expense (income), net in the unaudited Condensed Consolidated Statements of Operations.

(2)
The actuarial loss on U.S. non-pension post-retirement benefit plans of $1 during the three months ended March 31, 2017 relates to the decrease in discount rate as a result of the re-measurement of the accumulated postretirement benefit obligation on company sponsored post-retiree medical, dental, vision and life insurance benefit plans. This was triggered by plan provision changes for active retirees and employees. The Company recorded this expense in Non-operating expense (income), net in the unaudited Condensed Consolidated Statements of Operations.
11. Segment Information and Customers
The Company’s segments are based on the products that the Company offers and the markets that it serves. The Performance Additives segment is engaged in the manufacture, sale and distribution of specialty silanes, silicone fluids and urethane additives. The Formulated and Basic Silicones segment is engaged in the manufacture, sale and distribution of sealants, electronics materials, coatings, elastomers and basic silicone fluids. The Quartz Technologies segment is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. In addition, the Corporate segment consists of corporate, general and administrative expenses that are not allocated to the other segments, such as certain shared service and other administrative functions.
Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by segment. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and certain other income and expenses. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals.

Net Sales(1):
 
Three Months Ended March 31,
 
2018
 
2017
Performance Additives
$
248

 
$
220

Formulated and Basic Silicones
357

 
275

Quartz Technologies
52

 
49

Total
$
657

 
$
544

(1)
Inter-segment sales are not significant and, as such, are eliminated within the selling segment.


19


Segment EBITDA:
 
MPM HOLDINGS INC.
 
Three Months Ended March 31,
 
2018
 
2017
Performance Additives
$
54

 
$
47

Formulated and Basic Silicones
41

 
24

Quartz Technologies
9

 
7

Corporate
(10
)
 
(9
)
Total
$
94

 
$
69


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended March 31,
 
2018
 
2017
Performance Additives
$
54

 
$
47

Formulated and Basic Silicones
41

 
24

Quartz Technologies
9

 
7

Corporate
(10
)
 
(8
)
Total
$
94

 
$
70



20


Reconciliation of Net Income (Loss) to Segment EBITDA:
 
MPM HOLDINGS INC.
 
Three Months Ended March 31,
 
2018
 
 
2017
Net income (loss)
$
20

 
 
$
(30
)
Interest expense, net
20

 
 
19

Income tax expense
6

 
 
1

Depreciation and amortization
40

 
 
38


 
 
 
 
Items not included in Segment EBITDA:
 
 
 
 
Non-cash charges and other income and expense
$
6

 
 
$
6

Unrealized losses on pension and postretirement benefits

 
 
1

Restructuring and discrete costs
1

 
 
34

Reorganization items, net
1

 
 

Segment EBITDA
$
94

 
 
$
69


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended March 31,
 
2018
 
 
2017
Net income (loss)
$
20

 
 
$
(29
)
Interest expense, net
20

 
 
19

Income tax expense
6

 
 
1

Depreciation and amortization
40

 
 
38

 
 
 
 
 
Items not included in Segment EBITDA:
 
 
 
 
Non-cash charges and other income and expense
$
6

 
 
$
6

Unrealized losses on pension and postretirement benefits

 
 
1

Restructuring and discrete costs
1

 
 
34

Reorganization items, net
1

 
 

Segment EBITDA
$
94

 
 
$
70



Items Not Included in Segment EBITDA
Not included in Segment EBITDA are certain non-cash items and other income and expenses.
For the three months ended March 31, 2018 and 2017, non-cash charges primarily included loss due to the scrapping of certain assets, stock based compensation expense, and net foreign exchange transaction gains and losses related to certain intercompany arrangements. In addition, for the three months ended March 31, 2017, non-cash charges also included asset impairment charges.
For the three months ended March 31, 2017, unrealized gains (losses) on pension and postretirement benefits represented non-cash actuarial losses recognized upon the remeasurement of our pension and postretirement benefit obligations.
For the three months ended March 31, 2018 and 2017, restructuring and discrete costs included one-time expenses for services and integration. In addition, for the three months ended March 31, 2017, these costs also included costs arising from the work stoppage inclusive of unfavorable manufacturing variances at our Waterford, NY facility and restructuring.
  



21


12. Changes in Accumulated Other Comprehensive (Loss) Income
Following is a summary of changes in “Accumulated other comprehensive (loss) income” for the three months ended March 31, 2018 and 2017:
 
Three Months Ended March 31,
 
2018
 
 
2017
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
 
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
30

 
$
(48
)
 
$
(18
)
 
 
$
17

 
$
(93
)
 
$
(76
)
Other comprehensive income before reclassifications, net of tax (1)

 
35

 
35

 
 
12

 
22

 
34

Amounts reclassified from Accumulated other comprehensive income (loss), net of tax
(1
)
 

 
(1
)
 
 
(1
)
 

 
(1
)
Net other comprehensive (loss) income
(1
)
 
35

 
34

 
 
11

 
22

 
33

Ending balance
$
29

 
$
(13
)
 
$
16

 
 
$
28

 
$
(71
)
 
$
(43
)

(1)
Other comprehensive income related to defined benefit pension and postretirement plans for the three months ended March 31, 2017, represents the recognition of prior service benefits of $18, with the corresponding decrease in the projected benefit obligation following certain plan provision changes, reduced by tax expenses of $6, for the three months ended March 31, 2017 (see Note 10).

13. Income Taxes
The effective tax rate was 24% for both Momentive and MPM, for the three months ended March 31, 2018 and (3)% and (4)% for Momentive and MPM, respectively, for the three months ended March 31, 2017. The change in the effective tax rate was primarily attributable to the amount and distribution of income and loss among the various jurisdictions in which the Company operates. The effective tax rates were also impacted by operating losses generated in jurisdictions where no tax benefit was recognized due to the maintenance of a full valuation allowance, tax impact of recognition of net prior service benefit following certain plan provision changes, and the resolution of certain tax matters in non-U.S. jurisdictions.
For the three months ended March 31, 2018, income taxes included favorable discrete tax adjustments of $1 pertaining to the resolution of certain tax matters in non-U.S. jurisdictions. For the three months ended March 31, 2017, income taxes included favorable discrete tax adjustments of $5 pertaining to benefits curtailment, and the resolution of certain tax matters in non-U.S. jurisdictions.
The Company is recognizing the earnings of non-U.S. operations currently in its U.S. consolidated income tax return as of March 31, 2018 and is expecting that all earnings, with the exception of Germany and Japan, will be repatriated to the United States. The Company has accrued the incremental tax expense expected to be incurred upon the repatriation of these earnings. In addition, the Company has certain intercompany arrangements that if settled may trigger taxable gains or losses based on currency exchange rates in place at the time of settlement. Since the currency translation impact is considered indefinite, the Company has not provided deferred taxes on gains of $36, which could result in a tax obligation of $11, based on currency exchange rates as of March 31, 2018. Should the intercompany arrangement be settled or the Company change its assertion, the actual tax impact will depend on the currency exchange rate at the time of settlement or change in assertion.

In December 2017, The Tax Cuts & Jobs Act (the “TCJA”) was enacted into law. The TCJA decreased the federal corporate tax rate to 21%, imposed a one-time transition tax on previously unremitted foreign earnings, and modified the taxation of other income and expense items. The Company’s 2017 financial statements reflected provisional estimates for the one-time transition tax on the untaxed post -1986 earnings & profits (E&P) of our foreign subsidiaries, excluding our foreign branches. During the first quarter of 2018, the Company did not record any material adjustments to the provisional amounts recorded in the fourth quarter of 2017 related to the deemed repatriated earnings as it continues to obtain, prepare, and analyze information and evaluate legislative and authoritative guidance being issued.





22






14. Net Income (Loss) per Share
The following table presents the calculation of basic and diluted net income (loss) per share attributable to Momentive for the three months ended March 31, 2018 and 2017:

 
Three Months Ended March 31,
(in millions, except share data)
2018
 
 
2017
Net income (loss)
$
20

 
 
$
(30
)
Weighted average common shares—basic
48,129,578

 
 
48,084,933

Effect of dilutive potential common shares
522,557

 
 

Weighted average shares outstandingdiluted
48,652,135

 
 
48,084,933

Net income (loss) per common share—basic
$
0.42

 
 
$
(0.62
)
Net income (loss) per common share—diluted
$
0.41

 
 
$
(0.62
)
Antidilutive employee share-based awards, excluded

 
 
159,196

Employee equity share options, unvested shares and similar equity instruments granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are collectively assumed to be used to repurchase shares.
Due to the losses recognized during the three months ended March 31, 2017, there is no effect for potentially dilutive shares for that period.


15. Guarantor/Non-Guarantor Subsidiary Financial Information
As of March 31, 2018, the Company had outstanding $1,100 in aggregate principal amount of 3.88% First-Priority Senior Secured Notes due 2021 (the “First Lien Notes”) and $202 in aggregate principal amount of 4.69% Second-Priority Senior Secured Notes due 2022 (the “Second Lien Notes”). The notes are fully and unconditionally, jointly and severally guaranteed on a senior secured basis by each of MPM’s existing 100% owned U.S. subsidiaries that is a guarantor under MPM’s ABL Facility and MPM’s future U.S. subsidiaries (other than receivables subsidiaries and U.S. subsidiaries of foreign subsidiaries) that guarantee any debt of MPM or any of the guarantor subsidiaries of MPM under the related indenture (the “Note Guarantors”). The following condensed consolidated financial information presents the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, the Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 of (i) Momentive Performance Materials Inc. (“Parent”); (ii) the guarantor subsidiaries; (iii) the non-guarantor subsidiaries; and (iv) MPM on a consolidated basis.
These financial statements are prepared on the same basis as the consolidated financial statements of MPM except that investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The guarantor subsidiaries are 100% owned by Parent and all guarantees are full and unconditional, subject to certain customary release provisions set forth in the applicable Indenture. Additionally, the ABL Facility is secured by, among other things, most of the assets of the Parent, the guarantor subsidiaries and certain non-guarantor subsidiaries, subject to certain exceptions and permitted liens. There are no significant restrictions on the ability of Parent to obtain funds from its domestic subsidiaries by dividend or loan. The indentures governing the First Lien Notes and the Second Lien Notes contain covenants that, among other things, limit MPM’s ability and the ability of certain of MPM’s subsidiaries to (i) incur or guarantee additional indebtedness or issue preferred stock; (ii) grant liens on assets; (iii) pay dividends or make distributions to MPM’s stockholders; (iv) repurchase or redeem capital stock or subordinated indebtedness; (v) make investments or acquisitions; (vi) enter into sale/leaseback transactions; (vii) incur restrictions on the ability of MPM’s subsidiaries to pay dividends or to make other payments to us; (viii) enter into transactions with MPM’s affiliates; (ix) merge or consolidate with other companies or transfer all or substantially all of MPM’s assets; and (x) transfer or sell assets.

23



MOMENTIVE PERFORMANCE MATERIALS INC.
MARCH 31, 2018
CONDENSED CONSOLIDATING BALANCE SHEETS (Unaudited)
 
 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $0, $0, $1 and $1, respectively)
$
2

 
$
3

 
$
168

 
$

 
$
173

Accounts receivable

 
107

 
284

 

 
391

Due from affiliates

 
98

 
44

 
(142
)
 

Inventories:


 


 


 


 


Raw materials

 
79

 
85

 

 
164

Finished and in-process goods

 
145

 
170

 

 
315

Other current assets

 
11

 
38

 

 
49

Total current assets
2

 
443

 
789

 
(142
)
 
1,092

Investment in unconsolidated entities
1,706

 
409

 
20

 
(2,115
)
 
20

Deferred income taxes

 

 
11

 

 
11

Other long-term assets
4

 

 
12

 

 
16

Intercompany loans receivable
329

 
992

 
138

 
(1,459
)
 

Property, plant and equipment, net

 
541

 
647

 

 
1,188

Goodwill

 
105

 
115

 

 
220

Other intangible assets, net

 
119

 
178

 

 
297

Total assets
$
2,041

 
$
2,609

 
$
1,910

 
$
(3,716
)
 
$
2,844

Liabilities and Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
108

 
$
215

 
$

 
$
323

Due to affiliates
4

 
44

 
94

 
(142
)
 

Debt payable within one year

 

 
36

 

 
36

Interest payable
25

 

 

 

 
25

Income taxes payable

 

 
8

 

 
8

Accrued payroll and incentive compensation

 
50

 
33

 

 
83

Other current liabilities

 
32

 
63

 

 
95

Total current liabilities
29

 
234

 
449

 
(142
)
 
570

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
1,198

 

 

 

 
1,198

Intercompany loans payable
214

 
520

 
725

 
(1,459
)
 

Pension and retirement benefit liabilities

 
135

 
206

 

 
341

Deferred income taxes

 

 
60

 

 
60

Other long-term liabilities

 
14

 
61

 

 
75

Total liabilities
1,441

 
903

 
1,501

 
(1,601
)
 
2,244

Total equity (deficit)
600

 
1,706

 
409

 
(2,115
)
 
600

Total liabilities and equity
$
2,041

 
$
2,609

 
$
1,910

 
$
(3,716
)
 
$
2,844


24



MOMENTIVE PERFORMANCE MATERIALS INC.
DECEMBER 31, 2017
CONDENSED CONSOLIDATING BALANCE SHEETS

 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $0, $0, and $1, respectively)
$
14

 
$
1

 
$
159

 
$

 
$
174

Accounts receivable

 
94

 
229

 

 
323

Due from affiliates
3

 
62

 
40

 
(105
)
 

Inventories:


 


 


 


 


Raw materials

 
76

 
77

 

 
153

Finished and in-process goods

 
132

 
160

 

 
292

Other current assets

 
11

 
40

 

 
51

Total current assets
17